Consumer staples have been having a heckuva year due to an all-consuming search for yield and safety. Defensives like Hershey Co (NYSE:HSY), and The J.M. Smucker Company (NYSE:SJM) are rattled off on new high lists seemingly daily. P/E ratios are getting stretched and the whole sector seems dangerously overbought.
Apple Inc. (NASDAQ:AAPL) may be healthier
Apple Inc. (NASDAQ:AAPL) was last year’s darling and this year’s whipping boy. Hard to believe but Apple’s P/E at 10.04 and 2.30% yield is a better value than Smucker, best known for jams and jellies. Double the P/E and lower the yield (2.20%) and you get Smucker at 52 week highs looking a little pricey.
Not that these aren’t great American companies, but a newer American company has been lost in the shuffle that isn’t as defensive, but does offer yield and a lower P/E.
Go ahead and compare the PEGs, Apple Inc. (NASDAQ:AAPL) at .53 and Smucker at 2.24 and the jams and jellies are a little less palatable. Of course, Smucker also has coffee, pickles, peanut butter, baking products, and many more brands found in our pantries. This defensive name, even if a possible Warren Buffett target (but not likely with a strong founding family C-suite), shouldn’t have this rich a valuation.
Hershey Co (NYSE:HSY), America’s confectionery company, also has had an amazing run but its valuation is getting stretched like taffy. At a rich 30.29 P/E, you’d think this was a tech company but no, and its yield at 1.90% is getting less tempting. Its PEG at 2.55 is full of fat.
Hershey Co (NYSE:HSY) just hit another 52 week high on March 28 of $87.62. The term Bubblelicious comes to mind (although the brand is owned by Mondelez International Inc (NASDAQ:MDLZ)’ Cadbury division).
Analysts expect five year EPS growth at both Hershey Co (NYSE:HSY) and Smucker in the high single digits, about half the 18.98% growth expected for Apple.
Profit margins and operating margins at Hershey Co (NYSE:HSY) and Smucker are again half what they are at Apple Inc. (NASDAQ:AAPL). Still, almost inexplicably, Apple is down 26.17% over the last year and both these food stocks are up, 42% for Hershey and 21% for Smucker. What gives?
Affordable vs. aspirational
In Hershey’s case its smaller portion initiative became an affordable pleasure, available at every convenience, grocery, and drug store right at child height at the checkout counter. Product placement doesn’t get much better than that.
Smucker had an expanded product portfolio with a major move into coffee and the Street loved its improving earnings, beating after the bar was raised over and over again. Their products are prominent in our pantries and affordable. The stock, not so much…
Apple Inc. (NASDAQ:AAPL)’s products are still very much coveted, but the market seems to think everyone is holding their breath for the next big thing before they buy anything Apple. The price points are considered too “aspirational.” Apple doesn’t have the flexibility to raise prices that these food companies do when they face rising commodity costs.
Several analysts have noted that Apple needs to lower its prices and probably shrink those juicy margins to sell in China and other emerging markets.
A “blind” test
Imagine a blind “taste test.” Not knowing the names of these stocks Apple would likely win. Especially if you factor in the lack of debt at Apple with the debt load at Hershey and Smucker: a ratio of 1.44 and 2.94, respectively, for the most recent quarter. Then consider the lower dividend payout ratio of Apple at 12% to Hershey’s 54% and Smucker’s 42%.
